Alibaba Group (BABA 1.53%) and Shopify (SHOP 0.60%) are two very different e-commerce companies.
Alibaba owns Taobao and Tmall, the two largest consumer-to-consumer and business-to-consumer marketplaces, respectively, in China. Those two platforms generate most of its e-commerce revenue, but it also owns the business-to-business marketplace Alibaba.com, the cross-border platform AliExpress, the Southeast Asian marketplace Lazada, and the Turkish marketplace Trendyol.
Shopify doesn't operate any online marketplaces, unlike Alibaba. Instead, it provides the e-commerce tools that enable individual merchants to set up their own online stores, process payments, fulfill orders, and manage their marketing campaigns. That flexibility makes it an attractive option for merchants who don't want to join a crowded third-party marketplace like Amazon or eBay.
The bulls once considered Alibaba and Shopify to be attractive growth stocks, but they've both fallen more than 70% from their all-time highs. Let's see why these two e-commerce leaders lost their luster, and if either one is worth buying today.
Alibaba still faces many challenges
Alibaba's troubles started in 2021 when China's antitrust regulators hit the company with a record $2.8 billion fine, barred it from locking in merchants with exclusive deals, and restricted it from using aggressive loss-leading promotions. Its future investments and acquisitions would also be closely scrutinized.
That regulatory pressure eroded Alibaba's defenses against its closest competitors, JD.com and Pinduoduo, in China's cutthroat e-commerce market.
China also implemented rigid zero-COVID lockdowns throughout 2022, which disrupted its deliveries and curbed consumer spending. Alibaba's smaller cloud business also struggled as companies reined in their spending to cope with the macroeconomic headwinds.
All of those challenges, along with the broader slowdown of the Chinese economy, caused Alibaba's growth to slow to a crawl over the past year.
In the first nine months of fiscal 2023 (which started last April), revenue only rose 2% year over year as its adjusted earnings per American depositary share fell 2%. Its Chinese commerce revenue rose a mere 1% as its cloud revenue increased 5%.
For the full year, analysts expect its revenue and adjusted earnings to both rise 7%. For fiscal 2024, they expect its revenue and earnings to rise 11% and 14%, respectively.
That outlook implies that Alibaba's growth will stabilize as China ends its COVID lockdowns, but it's still growing at a slower clip than JD and Pinduoduo. It will also continue to face a lot more regulatory scrutiny than either of its smaller competitors.
Shopify needs to overcome challenges, too
Shopify established an early-mover advantage in its market, but it now faces fierce competition from similar e-commerce service providers like BigCommerce, Adobe Commerce (formerly Magento), and Amazon's new Buy With Prime feature for independent merchants.
As Shopify tries to stay ahead of those competitors, it faces tough comparisons to the pandemic period (which drove more sellers to open online stores), and inflationary headwinds, which curbed consumer spending on discretionary goods.
It was also rattled by Apple's (NASDAQ: AAPL) privacy changes on iOS, which made it difficult for Meta's (NASDAQ: META) Facebook and Instagram to craft effective targeted ads for online merchants. According to NerdWallet's small-business-loan company Fundera, 30% of all social media visits to Shopify's stores still come from Facebook, while roughly 29,000 Shopify stores sell their products on Instagram.
Shopify's revenue rose 21% in 2022, but its adjusted earnings per share (EPS) plunged 94% as it expanded its lower-margin Shopify Payments platform and logistics network. That decline occurred even after it laid off 10% of its workforce as it integrated the logistics company Deliverr last year. For 2023, analysts expect Shopify's revenue to rise 19% as its adjusted EPS declines 25%.
Shopify doesn't face any major regulatory headwinds like Alibaba does, but its slowdown will likely continue until the macroeconomic situation improves. Investors should also scrutinize the competitive threats and its exposure to Meta's Apple-related headaches before assuming its growth rates will quickly stabilize in the next bull market.
The valuations and verdict
Alibaba currently looks dirt cheap at nine times forward earnings and less than two times next year's sales, but it could continue to trade at those discount valuations as long as it generates anemic growth. The unresolved de-listing threats for Chinese stocks in the U.S. will also likely prevent the bulls from rushing back.
Shopify still trades at more than 1,500 times forward earnings and nine times this year's sales, so it definitely can't be considered a bargain yet. It still trades at premium valuations because the bulls like its long-term potential, but it could grow at a much slower rate over the next few years as it faces fresh macroeconomic and competitive challenges.
I don't like either of these e-commerce stocks right now. But if I had to choose one, I'd stick with Alibaba because its valuation could limit its downside potential as investors continue to prioritize value over growth in this tough market.